Insulet Investor Day – OmniPod Dash (Android PDM) launch in late 2017; Horizon AP launch in late 2019; $1 billion in sales by 2021 with over 65% margins – November 16, 2016

Insulet held its first-ever Investor Day today in Boston, sharing ambitious vision for 2021: $1 billion in annual revenue (roughly triple 2016 sales with a 20%+ CAGR), 65%+ gross margins (up from an expected 57% in 2016), an installed base of over 200,000 users (doubling the 100,000+ today), and “above-market” profitability. The 84 slide-deck here is definitely worth a look. Management shared tremendous confidence for the next five years and did a good job of painting the most detailed picture yet on the pipeline.

CEO Patrick Sullivan emphasized that Insulet is “an execution play” – the company has everything it needs to reach these “achievable” targets within its own walls. We left the four-hour meeting impressed with the vision and the team’s clear stepping stones to get there, particularly on the manufacturing front. While the pump market is only getting more competitive – and Insulet will be much, much later to market than other AID systems – the company’s tubeless pod is still highly differentiated. Over 80% of new OmniPod users are now from MDI, a clear sign it is still expanding the market. See the day’s top pipeline and financial highlights below in talks from Mr. Sullivan, President Shacey Petrovic, SVP of Advanced Technology Dr. Aiman Abdel-Malek, SVP of Global Manufacturing Charles Alpuche, CFO Michael Levitz, and VP/Medical Director Dr. Trang Ly.

Pipeline Highlights

1. A US launch of the next-gen Bluetooth-enabled pod and touchscreen PDM, “OmniPod Dash,” is expected by the end of 2017. A 510(k) will be filed with the FDA in mid-2017. The PDM will use a locked down Android phone (cellular turned off, no more integrated BGM). The Dash PDM will communicate with the pod via Bluetooth exclusively, and also talk to a secondary display app on a user’s smartphone to display integrated pump and Dexcom CGM data. Pictures below.

2. Launch of the OmniPod Horizon Automated Glucose Control system is expected in “late 2019,” with pivotal trials expected in late 2018-early 2019. Horizon recently completed its first in-clinic feasibility study with positive results, though the launch timing is later than the initial “late 2018” expectation – we assume Dr. Ly has a good plan in place and has built in some breathing space. The hybrid closed loop control algorithm will be integrated directly into the pod and talk to the Dexcom CGM, meaning users can walk away from the Dash PDM and still be in closed loop.

3. Launch of the Lilly U500 OmniPod is expected in the first half of 2019 (Lilly clinical trial ongoing), while the U200 OmniPod launch is expected in late 2019-early 2020 (Lilly clinical trial to run from 2017-2018).

4. Dash PDM integration with FreeStyle Libre – via NFC and LibreLink on Android – was positioned “as a potential expansion.” Insulet “has not explored this yet,” but it is an obvious move, given the existing BGM partnership with Abbott and the upcoming Dash Android PDM. Said management, “We think Libre is a great product, Abbott has been a terrific partner for us, and we are regularly having discussions.” Patients are looking for more and more interoperability though heaps are already happy with Dexcom. 

Financial and Business Highlights

5. CEO Patrick Sullivan and CFO Michael Levitz shared the goal of reaching $1 billion in sales by 2021, a 20% compound annual growth rate (CAGR) and a near tripling in sales from the expected ~$363 million this year. Growth will be driven by new products launching over the next five years (OmniPod Dash PDM, Horizon AP, U500, U200), geographic expansion outside the US (Europe and Asia Pacific), Medicare and Medicaid coverage, and Drug Delivery. A lot of things have to go right!

6. Insulet’s worldwide installed base just crossed 100,000 users, and management expects it to double to over 200,000 users by 2021. Remarkably, “80% or more of pod patients come from MDI,” up from the 70%+ Insulet has shared historically.

7. Insulet expects to deliver “above market profitability” and 65%+ gross margins by 2021 (up from an expected 57% gross margin in 2016). Echoing the 3Q16 update, management said there is a “very clear line of sight” to 65%+ margins over the next five years, and CFO Michael Levitz said the path is “straightforward execution, not magic.”

8. SVP of Global Manufacturing & Operations Charles Alpuche gave the most compelling manufacturing update we’ve ever seen from Insulet. The company will produce a remarkable 17 million pods in 2016, a 65%+ increase in daily output with a 20%+ reduction in total headcount in China. Manufacturing cost per pod is down an impressive 15% from last December (!), and by 2021, cost per pod is expected to drop a further ~15%-20% as a highly automated US manufacturing plant comes online in 2019 (construction begins in 2017). The new plant will offer “up to 70%” of the current capacity in China, but “up to 90%” fewer headcount.

9. Insulet expects Medicaid and Medicare access barriers to be removed in 2018-2019. The challenge is whether OmniPod should be covered under Medicare Part B (DME, like other durable insulin pumps) or Medicare Part D (drug benefit, which also covers insulin delivery devices). Dialogue with CMS is ongoing, and 2016 added six Medicaid plans.

10. Drug Delivery was a very minor part of the day, with the next meaningful opportunity expected to deliver commercial revenue in four years or more. Notably, the Amgen Neulasta OnPro Kit will deliver 50% of US doses by the end of 2016 (up from 44-45% in 3Q16).

Pipeline Highlights

1. A US launch of Insulet’s next-gen Bluetooth-enabled pod and touchscreen PDM, to be called OmniPod Dash, is expected by the end of 2017. A 510(k) will be filed with the FDA in mid-2017. We finally saw pictures and heard details on the new platform, which is completely different from the clunkier prototype we saw at ADA 2015. OmniPod Dash will now use a locked down Android phone as the PDM – cellular will be turned off and it will only run an OmniPod app (no more integrated BGM either). It is smart of Insulet to take a consumer-grade phone and turn it into the primary medical device (no need to build its own hardware from scratch), offering a big improvement over the current PDM and a consumer-grade touchscreen experience and UI/UX. The first picture of the new system was shown today:

• The Dash PDM will communicate with the pod via Bluetooth exclusively, and also talk to a secondary display app on a user’s smartphone to display integrated pump and Dexcom CGM data (see below). In other words, the new Dash PDM has two downsides: it will NOT display Dexcom CGM information on the PDM itself, and users will not initially be able to dose insulin from their own smartphone via Bluetooth (eliminating the need for a PDM entirely). The upside is much faster market launch, since the Dash Android PDM integrated with Dexcom would require a PMA instead of a 510(k). Plus, we assume most Dexcom users will simply get their CGM data in the G5 phone app anyways.

• The Dash platform will also have a caregiver follow app and a secure cloud. The schematic above implies that data will go from the Android Dash PDM to the cloud, though since cellular will be turned off, we assume this will use Wi-Fi or leverage the secondary display app on a user’s smartphone.
• Notably, the new Dash PDM is also pulling out the integrated Abbott BGM, though it will be able to receive data from Bluetooth-enabled BGMs (none were specified today). We’d note that current BGM partner Abbott does not have a Bluetooth-enabled BGM on the market (Ascensia, LifeScan, and Roche do). It did not sound like Insulet will submit a combined PDM and BGM to the FDA, but this was not addressed. Dr. Trang Ly rightly noted in Q&A that an integrated BGM is going to become less important as patients move to CGM, particularly non-adjunctive use with Dexcom.
  
  • Ideally patients could pair any Bluetooth-enabled BGM to the Dash PDM, though since the Android device will locked down, it seems unlikely this could happen without a specific partnership with Insulet.
• Insulet will transition the entire installed base over to the new Dash PDM and Bluetooth-enabled pods. The new PDM will not be backwards compatible with older pods (433 Mhz), so ultimately everyone will need to move over to the Dash platform. We see this as a major positive once the move is complete, though it will require delicate execution to avoid the sticky second-gen pod launch under the previous management team.
  
  • Insulet plans to have an upgrade program for the new Dash PDM, which sounds similar to what Tandem has done with the t:slim X2: a free upgrade if a PDM was recently purchased, and some upgrade fee if it’s older (we assume nominal, since Android phones are inexpensive). The specific pricing details are still being worked out.
• “Dash” implies “speed and agility,” and is also short for “dashboard.” Management said the Dash development program is “laser focused” on the patient experience, including a “terrific user interface,” a focus on repetitive tasks that podders do all the time (bolusing), making basal rate programming “dramatically easier,” adding features like a scroll wheel to log BG values, and a new redesigned food library.
• OmniPod Dash will also serve as the future platform for Insulet’s Horizon Artificial Pancreas and the U500 and U200 OmniPods. We wonder if the company will enable remote software updating on the Android PDM, allowing users to change their interface and get on these new platforms (similar to Tandem’s t:slim X2 pump); this was not discussed today. A major manufacturing advantage of all three programs, once Dash is launched, is they will leverage the same pod and Bluetooth communication protocol, and simply require different software on the Android PDM. (An exception is the OmniPod Horizon artificial pancreas will need a slightly different pod that embeds the control algorithm and talks to the Dexcom sensor.)

2. Launch of the OmniPod Horizon Automated Glucose Control system is expected in “late 2019,” with pivotal trials expected in late 2018-early 2019. No FDA submission timing was shared. Horizon recently completed its first in-clinic feasibility study with positive results (see below), though the timing keeps getting pushed back on this key product. The 1Q16 call expected a launch in “late 2018,” which was pushed back on the 3Q16 call to “2019” and now further to “late 2019.” We assume the path is now clear under new Medical Director Dr. Trang Ly’s watch. Since the company will be much later to market than Medtronic and potentially others (see our landscape), it must bring something truly differentiated. In addition to the tubeless design, management highlighted strong ease of use, pediatric approval, and flexibility to move in and out of closed-loop.

• As expected, the MPC hybrid closed loop control algorithm will be integrated directly into the pod and talk to the Dexcom CGM, meaning users can walk away from the Dash PDM and still be in closed loop. We think this is fantastic from a patient experience and safety point of view (it is similar to what Bigfoot is planning with its smartloop system). There was no mention of interacting with the Horizon system on a user’s own smartphone, meaning the Dash PDM will be needed to announce meals, issue boluses, etc. The secondary display app to monitor system status will remain. Presumably as FDA comfort grows, this could change.

• In Q&A, Dr. Trang Ly shared some topline data from the recently completed 36-hour in-clinic feasibility study in 24 adults with type 1: 70% time-in-range (70-180 mg/dl) and “close” to 0% hypoglycemia. According to the pipeline slide, IDE clinical trials will run through 2017, with pre-pivotal studies starting in late 2017 and running through mid-2018.
• Though Insulet will be more than two years later to market than the MiniMed 670G (and perhaps a year behind other systems), President Shacey Petrovic optimistically positioned it as an advantage:
  
  • “There is a lot to learn in the marketplace. Being second or third to market is an advantage for Insulet. There is a lot to learn about the training required, market access, and how people interact and adopt technologies. We’re not focused on additional bells and whistles. The user interface will only include what the user wants it to include, and it gives our users flexibility to move in and out of closed loop control. The other way we’re definitely differentiated is in evaluating the algorithm in the pediatric segment. It is the fastest growing piece of our patient population and our goal is to address that segment from launch.” In a potential nod to previous Medtronic products like the 530G, she added, “The big challenge that we have is that as you provide automation, it comes with increased complexity. The way you don’t want to answer that challenge is through alerts and alarms. Our goal is to provide an intuitive user interface that doesn’t overwhelm patients with alerts and alarms.”
  • Dr. Ly shared optimism too on Insulet’s position: “We are partnered with Dexcom, who has best-in-class technology. We have an excellent algorithm from UCSB, and we are now doing clinical studies under an IDE. As soon as the commercial platform is ready with a Bluetooth-enabled pod, we will be launching our product. Technically, I don’t see it as being difficult. I see this is a huge need for our patient population. What patients are living with now is terribly burdensome. There is no disease like diabetes, where decisions can cause hypoglycemia and death. The artificial pancreas is incredibly exciting, as it can alleviate the burden of diabetes. That’s why I’m here, and I believe Insulet, with the incredible passion and expertise, has the capacity to bring a better system to market ... Integration with CGM and having the algorithm in the pod itself is a huge advantage. It’s such a unique product and there is no other product on the market like it ...People want fewer devices. Not more devices.” – Dr. Trang Ly
• Insulet is working “very closely” with Dexcom. The new Insulet San Diego Innovation Center is just one exit away from Dexcom’s offices. New SVP of Advanced Technology and Engineering Dr. Aiman Abdel-Malek, formerly of Qualcomm and GE, brings tremendous mobile and internet-of-things experience to Insulet, including work with the Dexcom team in his previous roles: “I happen to know Jake [Leach] and others from my prior life, so that helps from a partnership perspective.” The new Insulet San Diego team has a combined >150 years of mobile software experience from Qualcomm and Broadcom, with particular expertise in wireless security.

3. Launch of the Lilly U500 OmniPod is expected in the first half of 2019 (Lilly clinical trial ongoing), while the U200 OmniPod launch is expected in late 2019-early 2020 (Lilly clinical trial to run from 2017-2018). This is the first clinical trial timing given on the U200 OmniPod, an expanded partnership with Lilly first announced in January at JPM. The U500 timing is on the later side of the 3Q16 expectations for a “late 2018 or 2019” launch. On the plus side, we’re glad that both programs will leverage the new Dash PDM and Bluetooth-enabled pod, far more simplicity for Insulet and for patients – bringing 2x and 5x the OmniPod reservoir volume in the same pod form factor is quite compelling. According to Shacey Petrovic, Insulet “will be the only pump on the market with U500 insulin.” We assume the deal with Lilly is exclusive, but cannot recall this ever being mentioned.

• The U500 and U200 OmniPods are expected to double Insulet’s addressable US market from ~1.5 million US type 1s to an estimated ~1.7 million insulin using type 2s. Management positioned this as an easy win in type 2, which we think was overly optimistic at this stage – pumps are still hardly used in type 2s, reimbursement remains difficult, not all patients will need basal and bolus insulin, and upcoming simple infusion devices (OneTouch Via, CeQur PAQ) will raise the bar for cost-effectiveness in type 2.

4. Dash PDM integration with FreeStyle Libre – via NFC and LibreLink on Android – was positioned “as a potential expansion.” Insulet “has not explored this yet,” but it is an obvious move, given the existing BGM partnership with Abbott and the upcoming Dash Android PDM. Said management, “We think Libre is a great product, Abbott has been a terrific partner for us, and we are regularly having discussions.” This would be a compelling form factor in our view, allowing patients to wear a pod and Libre sensor, and use the dedicated Dash PDM to engage with both. (Longer-term, perhaps both could be integrated into a user’s own smartphone, meaning no extra handheld devices to carry.) We assume the Dexcom partnership is not exclusive, and that Insulet could pursue working with Libre, but we have no information on this front.

Financial and Business Highlights

5. CEO Patrick Sullivan and CFO Michael Levitz shared the goal of reaching $1 billion in sales by 2021, a 20% compound annual growth rate (CAGR) and a near tripling in sales from the expected ~$363 million this year. Mr. Sullivan said there is a “clear path” to hitting this ambitious goal, and Mr. Levitz was even more optimistic: “We don’t view $1 billion as an audacious goal.” Given that growth over the past three years has been between 12% and 17% and that higher growth is more challenging from a higher base, we do think this is an extremely ambitious goal. Insulet expects to grow at a 20% CAGR within all of its business lines, given: the new products launching over the next five years (OmniPod Dash PDM, Horizon AP, U500, U200), geographic expansion outside the US (Europe and Asia Pacific), Medicare and Medicaid coverage, and Drug Delivery. The slide suggested a similar OmniPod vs. Drug Delivery split in 2021 as today (~83% OmniPod and ~17% Drug Delivery). Meaningful revenue from Drug Delivery on top of the Amgen partnership, however, is four or more years away. Although Insulet often exceeds the top-end of revenue guidance under the new management team, guidance is usually on the more conservative side.

• Said CEO Patrick Sullivan, “This slide screams opportunity. We have a 4% share of the overall US type 1 diabetes market. We should have a 50% share; 4% is not acceptable. We have a 1-2% share of the international type 1 diabetes market. We’re only in 16 countries today. We have a <1% share of the type 2 diabetes market. We’re going to double our addressable market with the plans we have in place. The market opportunity for the company is massive. We’ve got a long way to go and we’re only getting started.”

• Geographic expansion was mentioned only in general terms today, with future potential expansion in Western and Eastern Europe and Asia Pacific. Insulet estimates its total addressable market as 3.0-3.3 million patients in North America, 3.0-3.4 million in Western Europe, and 4-5 million in Asia Pacific. Specific countries were not mentioned. The agreement with Ypsomed continues in to the middle of 2018, and management was pretty balanced on resigning it: “We’d love to renew with Ypsomed, but if it doesn’t happen, it’s not the end of the world either. Our product has a lot of legs outside the US.” As a reminder, Ypsomed saw excellent growth in OmniPod in the first half of this year, but also just launched its own durable pump in Europe.

6. Insulet’s worldwide installed base just crossed 100,000 users, and management expects it to double to over 200,000 users by 2021. Remarkably, “80% or more of pod patients come from MDI,” up from the 70%+ Insulet has shared historically. The installed base stood at 85,000 at the end of 2016, and at this point, Insulet seems to be on its way to achieving more than the expected 20% base growth in 2016. Management emphasized that Insulet is “not taking share; we’re growing use of CSII.” Installed base growth in 2016-2017 will focus on MDIs (type 1) in the US and EU; 2018-2019 growth will increase from the U500 OmniPod launch, Medicaid and Medicare access barriers removed, the artificial pancreas launch, and geographic expansion; and 2020-2021 growth will accelerate with the U200 launch and geographic and product expansion.

• Management also shared hot-off-the-press 3Q16 data from dQ&A’s Diabetes Connections survey, suggesting it is the #2 pump overall in the US (behind Medtronic) and #1 in pediatrics. Medtronic is still dominant overall, but has a lower share in the dQ&A panel (41%) than we can recall historically (trended data over time was not given). We’d note that the fight for #2 is pretty close between Insulet (21%), Animas (18%), and Tandem (18%), and Tandem does have a new pump (t:slim X2) launching this quarter. In pediatrics, Insulet has a 32% share of the panel and is well ahead of Medtronic’s combined offerings (23%), Animas (22%), and Tandem (18%) – that is a trend we expect to continue, given the pod’s advantages in younger age groups.

• Management noted that other companies have larger portfolios of products, something Insulet will also add in the coming years. The company is also locked out of Medicare and many Medicaid plans for now (an estimated ~30% of the market), something it expects to change in the 2018-2019 time frame (see below).

7. Insulet expects to deliver “above market profitability” and 65%+ gross margins by 2021 (up from an expected 57% gross margin in 2016). Echoing the 3Q16 update, management said there is a “very clear line of sight” to 65%+ margins over the next five years, and CFO Michael Levitz said the path is “straightforward execution, not magic.” Insulet expects supply chain improvements and establishing US manufacturing (online in 2019) to play a major role, and the compelling presentation from SVP of Global Manufacturing & Operations Charles Alpuche (see below) definitely inspired confidence on this front. Margins took a hit in 2015 from important product quality and supply chain investments, but have improved throughout 2016. Insulet expects to be operating profitable breakeven in 2H16 and EBIT positive in 2018. Divesting the less profitable Neighborhood Diabetes business in February was the right decision in our view, even if the price was low. Many have long questioned whether Insulet’s disposable-focused business model can be profitable, though the new team left less doubt today – assuming execution goes as planned.

• One analyst wondered if a 65%+ gross margin might be conservative, given Insulet’s upside. Said CFO Michael Levitz, “I think we have a tremendous opportunity. Two quarters ago, our gross margin target was 60%+. Now we’re at 65%+. We want to deliver targets with credibility to shareholders. We are not stopping at 65%. We’ve just laid it out as target. This is an execution play, but we have a lot of work to do. Our expectations are not based on everything going perfectly. If there is caution built in, that is for normal life and execution. It’s wonderful we don’t have to buy businesses and to be part of this team that has done this before. I think we’re highly confident we can meet the target.”

8. SVP of Global Manufacturing & Operations Charles Alpuche gave the most compelling manufacturing update we’ve ever seen from Insulet. The company will produce a remarkable 17 million pods in 2016, a 65%+ increase in daily output with a 20%+ reduction in total headcount in China. Yields are up to 99% this quarter, with waste down over 50% and manufacturing cost per pod down an impressive 15% from last December. By 2021, cost per pod is expected to drop a further ~15%-20% as the highly automated US manufacturing plant comes online. Mr. Alpuche summed up the 2016-2021 manufacturing strategy as “very, very exciting” and said, “I am absolutely convinced we will do this. We have the right people. We’ve had product already on the ocean, and another container is on its way back from China. We’ve already executed what we said we would do next year.”

• In 2017, Insulet will begin building a highly automated US manufacturing plant, slated to come online in 2019 with “up to 70%” of the current capacity in China, but “up to 90%” fewer headcount. The new plant will give Insulet (i) redundancy beyond its single plant in China; (ii) similar overall production costs (China wage rate inflation is actually outpacing the US by nearly 3x, and combined with freight costs, is a similar price to US manufacturing); and (iii) much lower supply chain response time (from 25 days to 17 total). Said Mr. Alpuche, “We’re single sourced in China. That’s the worst mitigation. What happens if there is a typhoon or a mechanical failure? We must supply our patients every single time; their lives depend on it.”

• Nearer term, Insulet is building inventory and transitioning shipping to ocean freight, saving 50% over the current cost of air freight. The ocean freighters can also serve as “floating warehouses,” avoiding the incremental cost of warehouse infrastructure. The supply chain response time increases from 25 days now with air freight to 61 days with ocean freight, though this will decrease back down to 17 days with the US manufacturing line. We would say it sounds risky if not for the experience of Mr. Alpuche.

• Mr. Alpuche commanded tremendous respect throughout his talk, sharing 30 years of manufacturing experience at PepsiCo. He served as a consultant to Insulet for a few months and decided to come out of retirement and join the team. Previously, he was SVP of North America Beverages at PepsiCo, leading all bottling manufacturing and logistics operations – a very senior and serious role. Today, Mr. Alpuche noted that PepsiCo was one of the “most profitable products in the 20^th century,” and the company taught him one thing: “Make the absolute best quality product at the lowest cost.”

9. Insulet expects Medicaid and Medicare access barriers to be removed in 2018-2019. The challenge is whether OmniPod should be covered under Medicare Part B (DME, like other durable insulin pumps) or Medicare Part D (drug benefit, which also covers insulin delivery devices). Said CEO Patrick Sullivan, “We can take either one, but clearly CMS has authority to reimburse and cover this product. Whether its B or D, we’re just working through which one it is.” The lack of coverage locks Insulet out of an estimated ~30% of its eventual addressable market of 3.2 million patients (type 1 and type 2). On the plus side, 2016 added six Medicaid plans. Insulet has made a “significant investment” in its market access team. This did not receive much air time on the call, but it could be very meaningful for the business.

10. Drug Delivery was a very minor part of the day, with the next meaningful opportunity expected to deliver commercial revenue in four years or more. Notably, the Amgen Neulasta OnPro Kit will deliver 50% of US doses by the end of 2016 (up from 44-45% in 3Q16), quite remarkable adoption since less than 10% in 2Q15. Insulet is doing a nice business in this division ($16 million in 3Q16 and supplying 37% of the quarter’s growth), and the company has ongoing programs in oncology, cardiovascular, infertility, endocrinology, and others. Management could not share details about these pharma partners, however. A 20% CAGR in Drug Delivery is expected over the next five years, given the Neulasta success so far, upside from additional Neulasta penetration, and additional markets for Amgen like Europe.

• Management called the self-injection market “enormous,” growing at a 20% CAGR and anticipated to reach $10 billion in sales by 2020. “We believe the pod can address unmet needs,” including drug quantity, time of delivery (confirmed with digital connectivity with the Bluetooth-enabled pod), pain, and misuse. On the latter, the slide said “84% of patients misuse auto-injectors” (citation: Misuse of Medical Devices: A Persistent Problem in Self-Management of Asthma and Allergic Disease).

--by Adam Brown and Kelly Close